June 16 (Bloomberg) -- Like the band Spinal Tap in the 1984
mockumentary, most of the world’s central banks have cranked up
policy all the way to 11 in recent years.

Even Mario Draghi has dodged jeering from the Bundesbank to
take the European Central Bank where it has never gone before --
like the band’s customized amp: “What we do is if we need that
extra push over the cliff, you know what we do? 11,” turning
the dial beyond the traditional 1-to-10 volume settings.

After going “one louder,” ECB President Draghi, Federal
Reserve Chair Janet Yellen and their counterparts are still left
with what Bank of America Corp. strategist Michael Hartnett and
his team are calling a “Derek Smalls economy.” Quoting the
self-description of the faux band’s bassist, that’s neither fire
nor ice but “kind of like lukewarm water.”

Likewise, the world economy has escaped the chill of 2008
without ever getting hot. It’s still suffering from minimal
spending, lending and leverage, said Hartnett, BofA’s New York-based chief investment strategist, in a June 12 report. Nominal
U.S. gross domestic product, for example, is up just 19 percent
over the past five years versus an average 45 percent in past
recoveries.

At the same time, Wall Street is booming. BofA’s index of
U.S. bonds and stocks is up more than 75 percent from its 2009
low. The recovery in stocks alone has only ever been surpassed
from the bounce out of the Great Depression.

The dichotomy between real economy and markets is worrying
Hartnett even as he predicts equities will extend their gains.

‘Speculative Excesses’

“The longer it takes for growth and rates to normalize,
the greater the risk of speculative excesses and ultimately a
policy response aimed at curbing speculation in asset markets
before the economy has fully healed,” Hartnett said.

That leaves him anticipating a resurgence of market
volatility toward the end of the year either because economies
have caught light or central bankers start to highlighting
unjustified gains in asset prices.

“The greatest risk of all is that Wall Street excesses
rather than Main Street recovery force the Fed to tighten,”
Hartnett wrote.